In an audit of the Black Pink Sdn Bhd as of 31 December 2020, the following situations exist. No entries have been made in the accounting records in relation to these items.

1. During the year 2020, the Black Pink Sdn Bhd was named as a defendant in a suit for damages by the Big Bang Sdn Bhd for breach of contract. An adverse decision to the Black Pink Sdn Bhd was rendered and the Big Bang Sdn Bhd was awarded RM4,000,000 damages. At the time of the audit, the case was under appeal to a higher court.

2. On 23 December 2020, the Black Pink Sdn Bhd declared a common stock dividend of 1,000 shares with a par value of RM1,000,000 of its common stock, payable 2 February 2021, to the common stockholders of record 31 December 2020.

3. The Black Pink Sdn Bhd has guaranteed the payment of interest on the 10-year, first mortgage bonds of the BTS Sdn Bhd, an affiliate. Outstanding bonds of the BTS Sdn Bhd amount to RM5,500,000 with interest payable at 5% per annum, due 1 June and 1 December of each year. The bonds were issued by the BTS Sdn Bhd on 1 December 2018, and all interest payments have been met by that company with the exception of the payment due 1 December 2020 The Black Pink Sdn Bhd states that it will pay the defaulted interest to the bondholders on 15 January 2021.

Required:

i. Define contingent liability. (5 marks)

ii. Describe the audit procedures you would use to learn about each of the situations listed. (15 marks)

iii. Describe the nature of the adjusting entries or disclosure, if any, you would make for each of these situations.